Ethics in finance and in banks have attracted increasing attention after the global financial crisis of 2007-2009. Although engagement in more ethical activities for banks has been a legitimate social expectation, the impact of it on the financial performance appears to be unclear. We examine whether ethics-related disclosures can help banks create more liquidity by conducting textual analysis of hand-collected bank annual reports and unearth interesting findings. First, we find that the probability of including a code of ethics in the annual report increases with bank risk (i.e. loan loss reserves and risk-weighted assets). Second, our results indicate that liquidity creation is positively associated with the relative frequency of ethics-related terms in the annual reports of banks that publish a code of ethics. Our findings suggest that ethical bank disclosures can mitigate risk concerns and attract more business that allows banks to create more liquidity.
Kladakis, G., Chen, L., & Bellos, S. K. (2023). Ethical bank disclosures and liquidity creation. Journal of International Financial Markets, Institutions and Money, 84, Article 101754. https://doi.org/10.1016/j.intfin.2023.101754